Blockchain in insurance: why the industry needs to embrace the technology
Insurance, a bedrock of the global economy, has been around for the longest time.Now a multi-trillion dollar sector, the origins of the industry date back thousands of years. From the merchants of old to the large corporations that we have today, companies and individuals have long sought some kind of protection against the unexpected.
The industry plays a critical role in the modern economy. It allows companies and individuals to spread risk collectively and better predict financial performance. It has grown into a massive market since, with total insurance payments close to exceeding the $7 trillion mark for the first time. The industry now accounts for almost 10% of the entire global GDP, according to the Organisation for Economic Co-operation and Development (OECD).
Average insurance spending doubled in the past 30 years
Gross direct insurance premiums, total, in USD per capita.
Source: Organisation for Economic Co-operation and Development (OECD).
Insurance in practice
Insurance is an agreement in which an individual or a company (policyholder) receives financial coverage from an insurance firm (underwriter). The company agrees to deliver a payout to the client in the case that certain risks occur. In exchange for that protection, the client pays a monthly fee (premium) to the insurance company.
The odds are that most people who pay for insurance won’t ever have to experience a loss themselves. Only a small number of clients eventually face events. Those who do, however, encounter that the process of being reimbursed is far from enjoyable.
Long waits for settling claims, high premiums, and little transparency concerning claim assessment and pricing have created a distance between insurers and the insured.
Several consumers buy insurance by phone calls, policies are sometimes handled on paper. Claims require manual inputs from an employee. At every step, information can be misplaced, policies misinterpreted, and settlements prolonged endlessly. Ultimately, it is the policyholder who bears the brunt of these inefficiencies.
Small businesses and individuals can struggle to buy protection that meets their specific needs and budgets. Moreover, insurance companies are often missing out on untapped markets, where smaller and often vulnerable segments struggle to secure insurance at all.
Premiums in the insurance industry slowed down in 2022
Real premium growth, 2020–2023F, non-life and life E = estimate, F = forecast
Source: Swiss Re Institute.
Certainly, running a profitable insurance business is a complex operation. It involves dealing with consumers, brokers, reinsurers, lawyers, and regulators. They sign a multitude of policies, and must assess risk on an ongoing basis.
And then we must consider the issue of insurance fraud.
The FBI estimates the cost of insurance fraud at $40 billion a year in the United States alone. And it is not only insurance companies losing money down the pipe. Families end up paying between $400 and $700 more in monthly premiums as a result of the actions of a few bad actors.
The power of parametric insurance
For many of these issues — higher costs, long claim assessments, lack of financial coverage in certain segments-, parametric insurance can offer a better way.
In parametric insurance, payouts are triggered by predefined events, with straightforward conditions that leave little room for doubt. This is different from traditional insurance in that payouts are instructed directly when key parameters are met, allowing clients to bypass an arduous claim process.
Through parametric insurance, on the contrary, claims are no longer interpreted through the eyes and mind of a human. Instead, they are executed through a contract that hinges on trusted real-world data sources.
Certainly, parametric insurance exists in the industry today. It is common to find such insurance applied to protection against catastrophes and environmental risk.
But developments in the blockchain insurance industry have brought new opportunities to the sector. Together, blockchain technology and parametric insurance pave a way for both cheaper and more widely accessible insurance in the real world.
Smart contracts as a tool for parametric insurance
In many ways, the intrinsic design of parametric insurance relates easily to smart contracts, the underlying foundation of blockchain technology.
Smart contracts, a software run on decentralized ledgers, can be a perfect fit for parametric insurance. They can be programmed to instruct payouts whenever predefined conditions are met.
Powered by blockchain technology, smart contracts are appropriate for reducing inefficiencies and human error. Also, they contribute to increasing transparency as all stakeholders have a complete line of sight of the entire process.
Together with parametric insurance, blockchain technology leaves less room for opaque practices when it comes to assessing damage and determining a payout. Instructions are already defined in the smart contract, where records cannot be erased or altered once written, and are verifiable and accountable to both the company and the policyholder.
Successful use cases
Leading insurance companies are now exploring blockchain’s potential to transform the business. “The core benefit is that it builds trust between parties sharing information,” Mark Lounds, an underwriting manager at the world’s largest reinsurer, Munich Re, said in a post. “The information shared is encrypted as an electronic list of records or blocks. It cannot be erased, which helps to ensure trust between users.”
Blockchain technology can also reduce transaction costs. By design, smart contracts are faster and cheaper than traditional parametric insurance contracts.
In that regard, business cases stemming from the combination of parametric insurance and smart contracts are limitless.
Take for instance flight insurance. Through a smart contract, passenger payouts can be automatically executed once the contract collects publicly available real-world flight data.
Unlocking potential in the insurance industry
Over the past decade, technology has dramatically changed industries like banking, transportation or retail. But in the case of insurance, the multi-trillion-dollar industry is lagging in terms of innovation.
In general, the industry is not short of repetitive, labor-intensive steps when, for example, onboarding a client, settling a claim, or issuing a policy. All of these can be streamlined through the use of blockchain technology and parametric insurance. Its gains can be ultimately shared with policyholders through lower fees and an improved experience.
At Ensuro, we believe the powerful combination of blockchain, smart contracts, and oracles deserves a proper assessment. The rise of the internet of things (IoT) creates an even stronger case, as wider availability of trusted real-world data sources massively expands the scope for automated insurance policies.
It’s clear technological advancements are necessary in insurance, not just for introducing efficiencies but also perhaps for ensuring its long-term sustainability.
Blockchain technology can play an important part in this.
About Ensuro
Ensuro is the first decentralized, licensed (re)insurer on a public blockchain. We use smart contracts to curate competitive insurance portfolios. We allow anyone to invest in insurance risk and reap its benefits. By opening up the insurance market to new players, we fuel innovation for established and upcoming insurance partners.
If you want to know more about what we are doing, do not hesitate to reach out to us by email at info(at)ensuro.co or through the following channels:
